Home Equity Loans – The Basics – Part 2
Home equity loans is a fairly large topic, due to this, we have split it into three different post. This is post #2. Types of home equity loans will be briefly outlined and explained in this post. There are three main types, the first is the standard home equity loan and the second is home equity line of credit and third is cash-out refinancing.
The Standard Home Equity Loan
This type of loan is referred by three different names; term loan, second mortgage or a closed-end loan. This works just like an average loan. You select the loan period, IE: 10, 20, 30 years, and you pay on a fixed interest rate. When paying with a fixed interest, the monthly payments would be fixed as well. An example would be if your home equity loan is $30,000 with an interest rate of 7.5% for 10 years. Your monthly payment would be $365/mo.
Home Equity Line of Credit
This type of loan works like a credit card. You will be given an account in which a sum of money is placed. You withdraw money from the account as you need it. The interest rate on the loan is variable, meaning it will change over the period of the loan. When you borrow money from the account, you only pay interest on the amount you took out. However, you can discuss a deal with your loan lender and ask for a fixed rate. In a home equity line of credit, you can withdraw money, pay that sum back, and withdraw some more. This is a very good idea, and this helps stay out of debt. The process you would need to withdraw money will be given by your loan lender, most of the time you will be given a booklet of checks or a credit card.
Cash-out Refinancing
This type of loan is not really a home equity loan, but it does let you borrow money from the value of your home. In this type of loan, you take out a new mortgage, which has a value higher than what you presently owe. This is like finishing your mortgage and using the balance as a second loan. Cash-out refinancing comes with a lower interest rate but it has higher closing cost compared to a home equity loan.
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